12 Chapter 5

CHAPTER V
Special Economic Zone: Economic Implications
5.1. Introduction
The magnitude of economy of given country is usually estimated from its

trade and investment relations with rest of the world, particularly the volume and
development of trade from in that country. Exports orientation and growth help the
firms to accomplish higher efficiency in production activities through application of
„economies of scale‟ due to larger market size (Albassam, 2014). Various empirical
studies also indicate that exports activities may also enhance the innovative
undertakings of the firm, with new products, new technologies and new methodology
of transection to be competitive in international market. According to Sjoholm (1999)
for a country to be successful in international market, it requires good knowledge and
information about the international market, peaceful industrial environment, standard
regulations, foreign preferences, distribution channels and other market conditions.
There are different channels where foreign investment can take place in home country.
The most important channel of such foreign investment is through the Foreign Direct
Investment (FDI)11 by Multinational Companies (MNCs).
Most of the developing Asian countries (like China, India, Indonesia,
Malaysia, Thailand, etc.) are now generally working towards export-oriented
activities to attract FDI to strengthen their share in international trade (Aggarwal,
2005). The presence of export-oriented FDI activities may induce the domestic
companies to diversify into export oriented trade with availability and accessibility of
information on foreign markets and international trade as spillovers (Palit and
Bhattacharjee, 2008).
It is evident that Indian SEZ model is quite different as compared to the rest of
the world in terms of engagement and participation of private capital on such a big
11
Foreign Direct Investment (FDI) is an investment made by a company or entity based in one country,
into a company or entity based in another country. Entities making direct investments typically have a
significant degree of influence and control over the company into which the investment is made.
83
scale. Most of successful SEZs are established and run by government capital and
state investment in infrastructure in India. However, economic growth, productivity
seeking and export-oriented SEZ units can be materialized only if the bureaucratic
regime facilitates greater flexibility and freedom to the in terms of labour legislation,
license policy and other red tape related growth discouraging obstacles (Topalova,
2004). Economic liberalization and reforms will compel introduction of the higher
tariff, restructure their strategies by MNCs depending upon the targeted market,
increased competition from imports, new foreign companies and reputed domestic
firms. The existing SEZ affiliates have to move towards technology advancement
either through process of technology transfer or through more research and
development (R&D) activities to enhance their competitiveness (Joseph, 2005).
Therefore, economic reforms to be more market friendly would not only catalyse
more efficiency-seeking, export-oriented SEZ but also force the existing companies to
reframe their strategies.
5.2 Theoretical approaches and Economic rationale for SEZs
5.2.1 The Neo - Classical Approach (Orthodox view): The conventional neo classical
economic theory interpretations of SEZs as region offering business friendly open and
free trade policies framed with the goal of promoting trade. It says free trade is the
paramount policy for a state to implement. If free trade policy is not politically viable
at economy at larger extent, some wellbeing gains may be gained from establishment
of SEZs. SEZs consequently characterise, at best, a second best policy action. When
observed from a static perspective, SEZs as a scheme are distortionary trade
instruments which lead to mislead trade trends, encourage unfair competition between
domestic and SEZ located firms, government revenue loss and if the remaining part of
the economy is not liberalised to the SEZ extent then it will convert these enclaves in
to production zone with little meaningful economic contribution. The neo classical
approach argues that SEZs are beneficial only when the government uses it as an
instrument for further reforms in economy. The role of these kind of scheme should be
transitory, enabling the transition of an economy from import oriented regime to free
trade export oriented regime with negligible government intervention (Kokko, Zejan
and Tansini, 2001). Scheme such as SEZ lose their relevance as economy implement
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it throughout the country as systemic trade mechanism, macroeconomic policies and
exchange rate reforms through liberation (Madani 1999).
5.2.2 The Political Economy Approach: The political economy perspective of SEZs
is largely constructed on the „public choice theory‟ profounded by Buchanan and
Tullock (1962), which is based on the several aspects of interest group theories on
political science and neo classical economic theory. It claims that the provision of
government intervention encourages lobbying by groups with wasted interest for rent
seeking purposes. The foremost lesson of the political economy approach which
supports the principle of “minimalist government”12 is that the paramount strategy for
all economies and in all conditions is to liberalize – and not much intervention (Rao,
2004). Free trade condition with least government intervention alone can ensure
economic growth. The goal of the SEZ policy according to this theory is to create
rents to a few capitalists by facilitating them with land acquisition and offering tax
incentives at the cost of the others would result into welfare with trickle-down effect
but largely it reduces the overall welfare (Ghosh, 2004). The argument of the self-
regulating market and minimum government intervention has gradually been
criticised. Experience suggests that industrialised states authorities manipulated and
sustained rents to create a capitalist class and after the making of this class, used these
rents to promote to invest for further economic growth (Khan, 1999).
5.2.3 The Heterodox Approach: Whereas the neo classical theories are occupied with
markets and say that reducing the role of the government is critical in minimizing
market distortions. The heterodox school promotes a combination of state-market
interactions, in which governments play an important role in investment, human
capital formation, and transfer of technology, institutional reforms, and the promotion
of liberalised policy (Chang 2002). This theory is based on the concept of endogenous
growth and development and new institutional theories. It argues that domestic
companies lack the technical, managerial and marketing knowledge and they rarely
have access to global distribution network. In this setup, SEZs are a government
promoted scheme to fill the wide gap to the certain extent. Supportive the investment
environment with adequate infrastructure, transparent governance, smooth regulatory
12
Minimalist Government is a political philosophy and a form of libertarianism. It is variously defined
by sources. In the strictest sense, it holds that states ought to exist (as opposed to anarchy), that their
only legitimate function is the protection of individuals from aggression, theft, breach of contract,
and fraud, and that the only legitimate governmental institutions are themilitary, police, and courts.
Such states are generally called night-watchman states.
85
system, availability of skilled manpower, tax benefits and strategic locations may
benefit the economy in long term. SEZs are significantly influential in attracting large
amount of foreign and domestic investment. SEZ being able to attract FDI is also
inviting advance technologies and effective managerial skills to Indian territories.
The presence of foreign companies creates significant spillovers in terms of
economy particularly human resource development. These spillovers comprise of
workers & management training programmes such as learning by doing and on-the-
job training, demonstration effects, and effect on the standard of human capital in host
economy. Setting up SEZs can offer scope and opportunity for learning, development
and transformation. Though, in this background also SEZs are a second best policy. If
the country‟s business environment is meaningfully improved, SEZs can turn in to
redundant policy measure for economic development (Parwez, 2015). Explosion of
SEZs throughout the world (including many in developed nations) has led to the
requirement of strong theoretical foundations for establishment of SEZs for
meaningful contribution to the economy. It is suggested that the heterodox approach
to be extended to the extent that it embraces the agglomeration economies approach
and the global value chain approach to explain and enhance contribution of SEZs and
economic enclaves.
5.2.4 The Global Value Chain Approach: The process of globalisation is
complemented by a speedy development of “global value chains”. The entire process
of production, from availing raw materials to processing to finished produce, has
gradually been cut down and each activity is carried out wherever the required skills
and raw materials are accessible at competitive low cost either through off-shore
outsourcing and/or offshoring (Aggarwal, 2010). Offshore outsourcing of raw
material is connected with sub- systems of the entire production activities to
specialized firms abroad while off-shoring is the moving production facility to a new
more appropriate location in another country through affiliates firms.
Nevertheless, market players alone cannot ensure an effective integration of
domestic firms in these chains of network (Parwez, 2014). Worldwide competition is
so strong that unless thoughtful policies are introduced to nurture a complimentary
investment environment in terms of enhanced adequate infrastructure, simple rules
and harmonised regulations, and standards with domestic, bilateral, regional, and
international practices, domestic businesses in these countries are not generally able to
86
benefit from the opportunities of integration within these networks. By proposing a
facilitating business environment SEZs enable the host country‟s insertion into
international value chains network through both off-shoring and off-shore outsourcing
raw material and goods. SEZs therefore encourage both domestic investment and
foreign direct investment.
Although there is substantial literature on the functionality of FDI in
technology transfers and diffusion in developing economies, the contribution of
outsourcing to domestic companies in technological advancement of the economy has
attracted little attention. Outsourcing has attracted huge amount of export
opportunities for domestic companies in developing economies. Integration and
inclusion within the international value chains is a significant mechanism for
strengthening the competitiveness of emerging economies firms and enhancing their
productivity. Integration into international chains ensures access to a worldwide pool
of capital, markets, advanced technologies, skills, advancement of firm-level
competencies from „experience‟ through technology transfer and exposure to
transnational best business practices of corporate governance (Mukhopadhyay and
Pradhan, 2009). As a result of „learning by exporting‟ they will more equipped, can
compete in more sophisticated market segments such as marketing, branding and
design etc. It will develop them as a potential instrument for promotion and
diversification of export oriented production and service activities. Eastern and south-
east Asia based SEZs are perfect example of advancement among developing country
firms.
5.2.5 Agglomeration economies approach: This approach does not pay attention on
the concept of augmenting resources for economic growth but on reallocation of
resources for promotion of productivity and innovativeness. The benefits of
agglomerations approach are embedded in: knowledge spillovers, resource sharing,
and labour assembling. Within this structure, SEZs are government promoted enclaves
of export oriented firms, both foreign and domestic, are establish to take benefits
arising from international value chains. These economic zones enhance productivity
and branch out innovation by bringing together technology, knowledge, specialized
ability, competitive firms, supporting firms, quality academic institutions, and other
value addition to organizations (World Bank, 2008). The success of economic zones
rest on four sets of elements: firm‟s structure, approach and rivalry, demand situations,
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factor conditions and supporting auxiliary firms. The more critical and stable
interaction of these factors, the greater will be the productivity of these economic
zones. The more export oriented these economic zones are the greater is the intensity
of interaction among these elements. Interaction with global market will stimulate the
advance industrial activities in SEZ units, increases factor specialisation and demand
superiority of firm.
Additionally, interaction of foreign and domestic firms strengthens these
benefits further with additional linkages, facilitates technology transfer and
demonstration effects. Domestic firms gain great deal knowledge through proximity
with global firms in terms of know-how to improve their productivity, achieve
consistent and high quality product and improving the response time. According to
Kim and Zhang (2008) geographically concentrated foreign firms are better option
than dispersed foreign firms for transferring the technological knowledge and
requisite managerial skills through training and spillover to domestic firms.
Companies in the cluster furnace linkages with external players and improve their
competitiveness as well.
Enormous comprehensive SEZs are grounded on the concept of industrial
districts. Becattini (1990) disseminated the term and defined the industrial district as a
„socio- territorial region which is comprised with the presence of both a member‟s
social community and a population of firms‟. He stated that „in the district, unlike in
other environments . . . community and firms tend to merge‟. The key element of this
model is: geographical and sector wise clustering of firms; cooperative competition; a
socio-cultural identity which generate trust and active community based organizations
(Schmitz, 1995). The progression of globalization has increased the pressure to
cultivate cities of global standard which can optimise the resources at domestic,
national, and international level. In this regard, these industrial districts can act as
knots for internationalisation and economic growth. Urban and industrial
agglomerations strengthen collaborations generated by each of them. In China, these
industrial districts have developed into central force for promoting the development
and transformation of the metropolises into global cities (Wei and Leung, 2005). Thus
SEZs are not a second best but developing into most profound option and instrument
for economic development.
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5.3 Economic Rationale and SEZs
Initial SEZs were set up as industrial clusters in form of Export Processing

Zone (EPZ). They were establishing to convert import substituting economies in to
export oriented economic production economies. The main factor of operating in
these zones was the various kinds of fiscal incentives being provided. Thus India‟s
early special economic zones could be seen as embodying the orthodox view
(Aggarwal, 2006). Economic reforms introduced in the mid-1980s and fast-tracked in
the early 1990s marked a radical shift from inward-looking to an outward export
orientation in India. Outward oriented policy for the growth of export is one of the
key determinants of economic growth. Export oriented growth is not merely about
balance of payments but its primary objective is to be key instrument in the process of
industrialization, economic growth, and employment creation.
Figure no 5.1: India’s SEZ policy

Generation of
Additional
Economic
Activity
Promotion of
Promotion of
Investment from
Export of
Foreign and
Goods and
Domestic
Sources SEZ Policy is Services
Guided by
need for
Development of
Creation of
Infrastructure
Employment
facilities
Opprotunities
Source: Conceptualise by the Researcher
89
A significant policy request that governments come across in developing
countries in general is how to promote exports. In order to promote exports, the
government of India initiated many new programmes and overhauled the existing
ones in the post-1991 economic reforms. In this regard, in the year 2000, the SEZ
scheme was also elevated through a modification in the Export-Import Policy 1997-
2002 to promote export oriented trade.
To enhance the export and manufacturing activities the Special Economic
Zones Act was enacted in 2005 with view that it would address the supply side
barriers and work as catalyst for the industrial dynamism, as it is need of hour. While
the SEZs offers various kind of fiscal incentives and several advantages comprised of
single window clearance, adequate social and industrial infrastructure in order to
make sure positive investment environment and promote economic activities
(Astarita, 2013).
The SEZ policy aims at attracting both foreign and domestic investment and
creating dynamism in terms of technological advancement, skills enhancement and
more effective managerial skill development through interaction of both domestic and
global firms. They offer a platform for international-domestic interaction by
establishment of enclave comprise of foreign and domestic firms which is likely to
stimulate and maximize spillovers. The most important objective of setting up of
SEZs in India is to serve the promotion of manufacturing of exports oriented goods.
The Ministry of Commerce (GoI) has shown great confidence regarding its growth, it
claims that exports will ultimately grow by five times; GDP will rise 2 per cent, and
will create more than 3 million jobs across India. The government also assert that
these SEZs will attract large amount of FDI, create mechanism for transfer of
advanced technology and will led to incentives for development of infrastructure.
India has also received a good response in terms of investment and
employment from SEZs. Government offering following incentive to investors to
attract investment:
(a) Special tax incentives as exemption and relaxation for foreign investments in the
SEZs.
(b) Greater economic independence to conduct global trade activates.
(c) Economic characteristics are represented as “4 principles”:
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(i) Construction development of primarily depend on attracting and utilizing foreign
investment capital (ii) Primary economic practices are foreign wholly foreign-owned
enterprises, joint ventures and as well as partnerships (iii) Manufacturing products are
primarily supposed to be export oriented (iv) Economic activates are to be market
driven. SEZs are scheduled separately in the scheme of national planning (including
financial planning) and have state level, economic zone wise authority on economic
and legal administration (Department of Commerce, 2015).
5.4 Development Models and Special Economic Zone
Recession, recovery and economic development have led to broad discussion

among scholars, academicians, corporate and government on the right economic and
development model for a given country. Various studies reveals that, growth in Gross
Domestic Product (GDP) should not be the only or most important determinant of
economic development, which in order to realise the most effective and inclusive
development, it must consider factor which led to human welfare such as literacy
rates, life expectancy, employment, equal distribution of income, child mortality rates,
sex ratio and so on (Basile and Germidis, 1984). Increases in national income
generally led to certain extent improvement in access to basic necessities for the
average population in a developing economy.
Also, higher incomes mean more savings, which led to higher access to capital
for investment by companies and entrepreneurs. Generally more investment means
greater productivity and increase in income for workers and population supposed to
be part of industrial and service sectors that generally go together with economic
growth. Furthermore, increase in incomes lead to more tax based revenue for state,
which can be spent on betterment of public goods like education, health care, and
infrastructure facilities, will results in actual improvements in standard of living for
not only population belongs to the upper and middle classes, but the poor people will
also benefit. There are few economic models which can be best possible catalyst for
economic growth and development in developing countries.
The model was conceived independently by R.F. Harrod (1939) and by E.
Domar (1946) as Harrod - Domar model, which was initially developed to understand
and analyse the business cycle, it was later on adapted to explain the economic
development and growth. This growth model explained that economic growth
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depends on the amount of labour and capital; more capital investment leads to capital
accumulation in economy, which produces economic development. The Harrod -
Domar model carries implications and guidelines for developing countries, where
labour is in abundant supply but physical capital is not adequate, leads to
underperformance or slow economic development.
Figure no 5.2: Harrod – Domar Growth Model
Increased
Savings
Incresed Incresed
Income Investment
Increased Large
Output capital
Stock
Developing nations do not have adequately higher income level to be enabled

for adequate rates of saving reserve; therefore, accumulation of capital stock in the
economy through investment led growth is low. The model suggests that economic
growth largely depends on strategies to enhance investment in the economy, by
accumulation of capital through enhancement in saving, and spending that investment
more effectively through technological advancement to increase its productivity.
Most of developing countries have dual economies, the traditional agricultural
sector and the modern industrial sector. The characteristics of the agriculture in
economy of developing countries are low in productivity and low in incomes.
Therefore, these factors lead to low level of savings and high level of unemployment.
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The industrial sector as supposed to be technologically developed with high amount
of capital investment functional in an urban setting. Lewis (1954) suggested that the
industrial sector would draw labours from the rural areas. As the productivity level
and incentive in agriculture is low, it forces more workers towards the industrial
sector to enhance their income and raise the standard of living.
Figure no 5.3: Lewis Structural Change (Dual Sector) Model
Manufacturing Sector
Saving Reinvested
Capital Growth
Surplus Labour
Manufacturing
Sector
Saving Reinvested
Surplus Labour Capital Growth
Traditional Surplus Manufacturing

Agricultural Labour Sector
Sector
Higher income lead to higher savings and it lead to more capital investment
and more investment means to increase productivity and employment in the industrial
sector. The higher productivity generates the condition of more production in less
time, leads to more products for sale. It is always going to be motivating factor for
farmers and labour to move from relatively low productive agricultural sector to high
productivity of industrial set up. As the circle works like this, the number of persons
relied on the agriculture sector to earn living will decreases, so that the additional
amount can be sold to generate more income.
Applying the Lewis model to the Indian development model, as mentioned
that India boasted with large population as an agricultural country, so the positive
factor for India has been the large number of manpower to work in the industrial
sector in the newly established Special Economic Zones at that time. The SEZs
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establishment with economic incentive given to companies seized the opportunities
with low cost labour to the certain extent, economic hub such as USA, UK, European
countries are transferring their heavy manufacturing sector to the other places, and
India quickly developing as hub for low cost manufacturing for the export oriented
products like clothes, toys and low technology-added electronic goods at large scale.
Figure no 5.4: Rostow’s Model- the 5 Stages of Economic Development
Stage 5: High Mass Consumption

In 1960, the American Economic Consumer Oriented Durable goods, flourish,
Historian, W.W. Rostow Suggested that Service Sector becomes Dominant
countries passed through five stages of
economic development
Stage 4: Drive to Maturity

Diversification, Innovation, less reliance on
Imports, Investment
Stage 3: Take Off

Industrisation, Growing investment, Regional
Growth, Political Change
Stage 2: Transitional Stage Accoroding to Rostow, development

requires substantial investment in capital.
Specialisation, Surpluses, Infrastructure For the economies of developing countries
to grow the right conditions for such
investment would have to be created. If
aid is given or foreign direct investment
Stage 1: Traditional Society occurs at stage 3 the economy needs to
have reached stage 2. If the stage 2 has
Subsistance, Barter system, Agriculture
been reached then injections of investment
may lead to rapid growth.
The American Economic Historian, W.W. Rostow (1960) suggested that

generally countries go through five stages of economic development. According to
Rostow development model, it requires significant amount of capital investment. For
the economies of developing countries to grow, the appropriate environment needs to
be created for such kind of investment. If domestic investment provided or foreign
direct investment take place at the stage 3 of the economy requires to have achieved
the stage 2. If the stage 2 has been touched, it leads to injections of capital investment,
which may stimulate to rapid economic growth.
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In the context of India for application of Rostow´s model, before and after the
liberalisation policy is evident. India is historically recognised as an agricultural
dependent country, corresponding to the stage 1 in the Rostow´s model. India
introduced Liberalisation, Privatisation and Globalisation (LPG) 13 policy and started
promoting the establishment of the Special Economic Zones in more aggressive
manner, and then India entered in the second stage of model as characterized by factor
such as transition, surpluses and infrastructure. The government built more
infrastructure and institutional restructuring to sustain and enhance the economic
development and create a better investment and business environment.
When the SEZs are more verse, mature and are more productive in the process
of industrialisation with proper strategy of export led growth, they will be
instrumental in growth of GDP of India. They are drawing more foreign and domestic
investment for establishment units or joining hands with the local companies. India
has progressed in the process of industrialization but still far away from the desired
outcome; especially setting up SEZ has not generated the requisite results. The SEZs
themselves serve as the tool for economic and political changes. India is now
changing the development model from export-oriented to consumer-driven. In fact,
India is in the stage of moving from stage 3 to stage 4, making more indigenous
innovation, technology advancement, etc.
5.5 Tracing the Development of SEZs Worldwide
The worldwide „Great Depression14‟ at the end of 1920‟s, then in the latter
half of the 1960‟s there was a huge amount of alignment for creation of EPZs across
the world. Since 1950‟s most of the countries in the world have implemented export
zones policy to stimulate the economy and employment creation, for example, United
States, Puerto Rico and currently India, Taiwan, Brazil, China and many more for
rapid economic development of the region. The concept of economic zone has
developed and transformed from the original theory of industrial estates. The first
13
The economy of India had undergone significant policy shifts in the beginning of the 1990s. This
new model of economic reforms is commonly known as the LPG or Liberalisation, Privatisation and
Globalisation model. The primary objective of this model was economic development of the country.
14
The Depression of 1920 was an extremely sharp deflationary recession in the United States and other
countries, shortly after the end of World War I. The extent of the deflation was not only large, but large
relative to the accompanying decline in real product. Factors identified as potentially contributing to
the downturn include: returning troops which created a surge in the civilian labour force, a decline in
labour union strife, changes in fiscal and monetary policy, and changes in price expectations.
95
evidence of this is the establishment of Shanon EPZ in Ireland in year 1958. EPZ
Kandla in India and Kaohsiung EPZ in Taiwan both established in mid-1960
(Vadlamannati and Khan, 2013). With the introduction of policy to encourage export
oriented activities led to establishment of first EPZ at Kandla in 1965 and seven other
economic zones were set up in Mumbai, Chennai, Noida, Surat, Kochi, Falta, and
Vizag. India‟s experience with EPZ did not meet the desired result of stimulating
manufacturing industry for export and employment creation. So, India introduced the
SEZ policy in 2000 to encourage investment and manufacturing. Currently there are
in total 491 SEZs with formal approval so far, only 196 were operational in January
2015. It is evident that establishment of SEZ require substantial amount of land. The
total area covered by SEZs stands at 61,624 hectares, while China‟s largest SEZ,
Shenzhen in alone covers 49,300 hectares (Astarita, 2013).
A SEZ is a geographical enclave that has economic laws that are more liberal
than a country's general laws and policy. In broader terms SEZs are of different and
specific type of economic zone, including EPZ, Free Trade Zones (FTZ), Free Zones
(FZ), Urban Enterprise Zones, Industrial Estates (IE), Free Ports and others.
Generally, the objective of an establishment of SEZ is to increase foreign investment
and employment. One of the first and the most well-known SEZs were established by
the China in the early 1980s. The most successful SEZ in China has been the
Shenzhen, being developed from a small village into a large city with having a
population more than 10 Million within 20 years of its establishment. Following the
Chinese examples, several countries has established SEZs, including India, Brazil,
Russia, Kazakhstan, Iran, Philippines, Jordan, Pakistan, Poland, Ukraine and many
more. Currently, Puno, Peru has established a “Zona Economica” an industrial
enclave (Chitambara, 2015). A single SEZ can be comprised of multiple product and
multiple “specific” zones within its premises. The most prominent models of this
layered approach are the Aqaba SEZ in Jordan and Subic Bay in the Philippines.
An economic analysis by Economic Survey (2008) of SEZ policies in India,
suggest that policy change to liberalized economy is clearly identified using as
instrumental variables, SEZ happen to be one of them. Chinese experience has
suggested that increasing the number of SEZ has very negligible effect on economic
growth; greater growth is led by greater scale of liberalization, rather than the number
of SEZ. It has been implemented using a variety of institutional structures changes all
96
over the world ranging from public owned (government developer, government
operator, government regulator) to private (private developer, private operator, public
regulator). SEZs in India are often developed under the policy of public-private
partnership (PPP) mechanism, in which the state provides some basic level of backing
(infrastructural facilities, equity investment, financial assistance as soft loans, bond
issues, etc.) to facilitate private sector developer to obtain a reasonable rate of return
on the establishment of economic zone.
5.6 Special Economic Zone in India
An Special Economic Zone (SEZ) is an instrument for trade capacity

development, with an objective of promoting export oriented economic growth by
using tax concession and business incentives to attract foreign investment, technology
and generate positive trade environment. SEZ is being developed as geographical
regions that differ from prevailing economic regulations and has more flexible and
liberal economic and labour laws. Today, there are approximately 3,000 SEZs
operating in 135 countries, which account for over US$ 600 billion in exports and
about 50 million jobs (International Labour Organisation, 2011; Chitambara, 2015).
By offering liberal incentive terms, SEZs attract foreign exchange and investment,
create employment and promote the development through transfer of technologies and
improvement in infrastructure.
Most developing countries like India across the globe have acknowledged the
significance of expediting international trade for the sustained economic growth and
increased contribution to the GDP of the state. As an on-going process of commitment
to liberalization, economic reforms and to activate larger inflow of foreign and
domestic investment in the generation of added economic activity and the generation
of employment opportunities, government of India introduced the policy for
promoting SEZs. India was among the first few nations to recognize the usefulness of
establishment of economic zone model to promote exports oriented activities. Asia's
first EPZ was established in Kandla (Gujarat) in year 1965. EPZ„s did not able to
prove their necessity to being economically feasible, profitable and to develop Indian
economy, as it neither attracted the adequate foreign investments nor created the
employment opportunities (Aggarwal, 2004).
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There has been seven Export Processing Zones (EPZ) established by the
Government of India with the strategic view of boosting the economy at Kandla
(Gujarat), Santa Cruz (Maharashtra), Cochin (Kerala), Noida (U.P.), Chennai (Tamil
Nadu), Falta (West Bengal) and Visakhapatnam (Andhra Pradesh) along with a EPZ
in Surat, were converted into SEZs through announcement of the SEZ Policy. In
addition to these, 11 more SEZs were set up by the State Governments/private sector
during the period 2000-2005 in the States of West Bengal, Gujarat, Madhya Pradesh,
Uttar Pradesh, Rajasthan and Tamil Nadu. After the coming into force of the SEZ Act,
2005 on 10th February 2006. Till January 2015 there is 491 SEZ with formal
approvals for establishing Special Economic Zones, out of which 352 SEZs have been
notified and are in various stages of operation. A total of 196 SEZs are operational and
exporting products (Department of Commerce, GoI, 2014).
Table no 5.1: The Current Status of SEZ in India
Number of Formal approvals 491 (Excluding 67 SEZs approved by BoA for

cancellation/de-notification)
Number of notified SEZs 352 (out of 491) + (7 Central Govt. + 11
(As on 5.15.2014) State/Pvt. SEZs)
No. of Valid In- Principal 33
Approvals
Operational SEZs 196 (Break up: 20 are multi product SEZs,
(As on 30th September, 2014) remaining are IT/ITES, Engineering, electronic
hardware, textiles, Biotechnology, Gems &
Jewellery and other sector specific Special
Economic Zones)
Units approved in SEZs 3,864
(As on 30th September, 2014)
Source: Special Economic Zones in India (http://www.sezindia.nic.in/), 2015
While there is some concentration in certain states, the fact that the approved
SEZs are spread over 20 States and 3 Union Territories indicates that these are not
confined to any particular region. The total land area involved in formally approved
SEZs including notified SEZs is around 67,787 Hectares that is not more than 0.014
per cent of the total land area of country (Dept. of Commerce, GoI, 2015).
Therefore, due to the several shortcomings in terms lack of experience on
account of the multiple points of controls and clearances; absence of adequate
infrastructure, and an unstable fiscal & monetary regime, led to introduction of the
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Special Economic Zones Policy in April 2000 as an act in 2005. The government
policy directed towards development of SEZs as an engine for economic growth with
development of world class infrastructure complemented by an attractive financial
package, both at the Centre and the State level, with the least amount of regulations
(Vadlamannati and Khan 2013).
To instil confidence among the domestic as well as foreign investment firms
and indicate commitment of government to establish SEZ policy, broad discussions
with the partners were held to develop a comprehensive draft of SEZ Bill 2005.
Thereafter, with adequate brainstorming the government of India laid down the norms
to govern and establishment of the SEZs. State Governments also plays important role
in the development of SEZs by introducing the required conditions to be followed by
an SEZ and providing the necessary approvals in time. The objective of introducing
the Special Economic Zones Act, 2005 was to overcome the limitations of prevailing
rulings and to streamline the processes for development, operation, and stability of the
Special Economic Zones for setting up units to encourage export oriented activities.
5.7 FDI and Special Economic Zones
After independence, India‟s development strategy was based on the

philosophy of national self-sufficiency, government regulation on the economy and
planned industrialization. Industrial policy largely seems to be backward looking and
highly interfering. The salient and micro level features of these policies comprise of
bureaucratic industrial licensing requirements, import protection, and public
ownership of heavy industries among others. India‟s economic administration was one
of the most deterring in nature among all the countries in Asia (Topalove, 2004).
Indian trade policy was attributed with high tariffs and widespread import restrictions.
To encourage the domestic manufacturing firms from international competition as
protective policy, the imports of manufactured consumer goods were banned. Capital
goods imports were controlled with red tape such as import licenses. The processes
for the grant of licenses were non-transparent with delays and high level of corruption
and the application of „actual user‟ policy restricted imports by intermediaries
(Ahluwalia, 2002).
These restrictive trade policies continued until the 1970s. However, due to
growing dissatisfaction about its outcome, there was a progression of India‟s
99
development strategy toward export-led growth during the 1980s. From the
experience of many developing countries in Asia, it was evident that to achieve high
growth and poverty reduction requires policies that promotes greater manufacturing &
export orientated industries and supporting the private sector. It led to several
reformative measures during the 1980s and 1990s. Process of industrial licensing and
permit was relaxed and restrictions on import were reduced. The 1991 economic
reforms and liberalization characterised by major structural changes including trade
and foreign investment relaxation. Realizing the significance of Foreign Direct
Investment (FDI) through Multinational Companies (MNCs) in increasing the
productivity, exports, generating employment and overall economic development, a
number of policy decisions were taken to attract more FDI, enhancing exports along
with other trade friendly economic policies. These policies have resulted in to increase
in inflow of FDI. The inflow of FDI has witnessed significance growth, led by the
reduction in tariffs and non-tariff barriers and also due to protection for Indian
industries (Ahluwalia, 2002).
Since the introduction of economic reforms in 1991, the attraction of India as a
business and investment hub has developed at a steady pace. According to a study by
Goldman Sachs (2012), Indian economy is expected to grow at the rate of 5 per cent
or more & is poised to develop as fourth largest economy by 2050. This encouraging
environment has been created through an enhanced level of reforms in policies by the
government towards foreign direct investment. Despite some prevailing issues with
special economic zones, India will continue to be an attractive destination for
investment.
There has been stability and positive trend in flow of FDI in India as it is
evident from the fact that FDI has increased from 28 billion in the 2013 to 34 billion
in the year 2014. UNCTAD„s World Investment Prospects Survey 2015 says that,
India has improved in ranking of the most favoured foreign direct investment (FDI)
country. As table 5.2 reveal that India is among the world„s 10 largest FDI recipients
in 2015.
100
Table no 5.2: FDI Inflows in Various Countries (in Billions of Dollars)
Sl. Countries 2013 2014
No
1 China 124 129
2 Hong Kong, China 74 103
3 United States 231 92
4 United kingdom 48 72
5 Singapore 65 68
6 Brazil 64 62
7 Canada 71 54
8 Australia 54 52
9 India 28 34
10 Netherland 32 30
Source: Global Investment Trends Monitor, UNCTAD, 2015
According to research estimates of CRISIL (2013), eight infrastructure sectors,

including oil and gas, power, roads, railways, ports, urban infrastructure, airports and
telecom, are attracted more than $345.28 billion investment to India between period
of 2007-08 and 2011-12 periods. CRISIL also reports that increasing financial
overheads due to high interest rates and on-going global recession may not affect the
investments sentiments for the infrastructure projects which suffering from long
gestation periods. Further, CRISIL Research says that "There are three key reasons for
positive sentiments for investment in Indian infrastructure - better institutional
structure for encouraging infrastructure investments, especially for the private sector;
with years of experience of government, regulators, corporates and other players
regarding the process of participation in infrastructure projects". The third reason is
the improved project implementation mechanism and financial capabilities of
corporates to handle large and complex projects.
5.8 Special Economic Zone and Investment
Exports, revenue and employment in special economic zone fundamentally

depend on investment. Promotion of investments, transfer of technology, and
utilisation of foreign and domestic sources is the main objectives of the establishment
101
of SEZ scheme. For that initiative such as introduction of FDI up to 100 per cent for
establishment of SEZs is allowed.
Table no 5.3: Investment in SEZ set up Prior and After Enactment of SEZ Act,
2005 (In Rs. Crore)
Type of SEZs Investment Incremental Total Investment
(As on February, Investment (As on 30th
2006) September, 2014)
Central Government SEZs Rs.2,279.20 cr. Rs.10,002.80 cr. Rs.12,282 cr.
State Govt./Pvt. SEZ established Rs.1,756.31 cr. Rs.8,937.69 cr. Rs. 10,694 cr.
prior to SEZ Act, 2005
SEZs Notified under the Act Rs. 0 cr. Rs.3,57,308 cr. Rs.3,57,308 cr.
Total Rs.4,035.51 cr. Rs.3,76,248.49 cr. Rs.3,80,284 cr.
Source: Special Economic Zones in India (http://www.sezindia.nic.in/), 2014
Table 5.3 reflects investment made in central and private/state government

SEZs units and it is evident that investment in notified SEZs is greater than in both the
private/State Government SEZs and Central Government SEZs. Table 5.3 describes
the investment made by Central Government and private/State Government SEZs for
the year 2013-14; it shows that investments by private/state government SEZ (Rs.
12,282 crore) is less than the investment made in central government SEZs (Rs.
12,282 crore) and Notified SEZs accounts for total investment worth Rs.3,57,308
crore. Growth rate in private/State Government based SEZ greater than Central
Government investment in SEZ, which reflects positive outcome as more activities
from State Government and private players are evident.
Table no 5.4: Government SEZs (EPZs converted to SEZs) (Rs. crore)
Sl. Zone Government Private FDI FDI Made Total Private

no. Investment Investment by Proposed Investment
Units (Excl. FDI) Made
1 Kandla SEZ 93.6 238.1 0.0 137.4 375.5
2 SEEPZ SEZ 57.3 625.1 461.9 154.3 789.4
3 Noida SEZ 117.7 540.0 0.0 135.0 675.0
4 MEPZ SEZ 87.5 434.3 252.5 237.4 671.7
5 Cochin SEZ 104.3 429.0 0.0 76.8 505.8
6 Falta SEZ 101.1 385.4 - 8.4 393.8
7 Visakhapatn 67.9 371.5 200.0 116.5 488.0
-am SEZ
8 Total 629.7 3033.7 914.4 865.8 3899.5
Source: Ministry of Commerce and Industry, Deptt. of Commerce (GoI), 2014

102
Additionally, table 5.4 displays the share of total investment made in various
central government owned SEZs. Total investment in central government owned SEZs
rose at Rs. 3,900 crore in the year 2007-08 and all central government SEZs received
same amount of investment, except for SEEPZ SEZ. Since the objective of
establishment of SEZs is attracting FDI into the country, in 2007-08 all seven central
government SEZs have attracted FDI in tune of Rs. 865.8 crore. The MEPZ SEZ with
the maximum amount of FDI in tune of Rs. 237 crore, followed by the SEEPZ SEZ,
Mumbai with the amount of Rs. 154.3 crore.
The total FDI received by SEZs in 2007-08 involves about 8 per cent of the
total FDI inflows into the country in all sectors. It is evident by the above information
that there is substantial scope to enhance FDI in SEZs all over the country. In contrast,
the private and state government owned SEZs stand nowhere in terms of attracting the
investment. Ironically, it must be noted that Nokia SEZ has received the most amount
of investment (about 50 per cent of the total investment in state government and
private SEZs), followed by SEZ in Indore and Mahindra City SEZ (IT), but the SEZ
unit located in Manikanchan, Jodhpur, Wipro, Mahindra City (Textile) and Surat
Apparel Park SEZs received a comparatively low amount of investment (Department
of Commerce, GoI, 2015).
5.8.1 Shortfall in Investments
SEZs were established to attract investment from foreign multinational
companies which was supposed to have a spillovers effect Indian economy at large.
The foreign investment in form of FDI was to be attracted with benefits being
provided to these companies and in return they bring foreign advance technology and
managerial skills to boost exports. There are many enterprises in the process of
applying and getting approval to set up a SEZ. It reflects on substantial amount of
investment projected to be made on SEZ model of business.
A study on state wise investment conducted by Comptroller and Auditor
General of India (2014) in respect of 79 Developers/Units, based on their projections
made while applying and the actual investments received reflected on some
interesting and eye opening facts on real investment made in these SEZs. It has been
observed that there is vast difference between actual investment (80176.25 crore) and
the proposed (194662.52 crore) in 79 Developers/Units in 11 selected major states,
103
comprises 58.81 per cent less than the projected amount. Data depicted in table 5.5,
also includes shortfall in FDI to the tune of Rs. 2468.53 crore (66.83 per cent).
Table no 5.5: Real Status of Investment in SEZs from Major States

Sl No. of Investment (Rs in Crore)
States Shortfall
no. Developers/
Projected Actual Difference (%)
Units
1 Andhra Pradesh 28 45897.41 11511.59 34385.82 74.92
2 Maharashtra 11 15433.86 4264.59 11169.27 72.36
3 Tamilnadu 4 1913.18 1369.5 543.68 28.41
4 Kerala 2 352.72 120.96 231.76 65.7
5 Karnataka 5 2700.34 1157.51 1542.83 57.13
6 Odisha 2 192.2 61.93 130.27 67.78
7 Gujarat 14 118962 58661.8 60300.2 50.68
8 Rajasthan 1 25.9 19.69 6.21 23.98
9 West Bengal 2 2773.88 874.57 1899.31 68.46
10 Uttar Pradesh 9 6146.03 1997.11 4148.92 67.51
11 Chandigarh 1 265 137 128 48.3
12 Total 79 194662.5 80176.25 114486.3 58.81
Source: Comptroller and Auditor General of India report, 2014
Five states (Andhra Pradesh, Maharashtra, Karnataka, Gujarat and Uttar

Pradesh) contributed to around 57 per cent of the total shortfall of the proposed
investment. It has been observed that in case of Madhya Pradesh, there was silver
lining as it does not suffer as much from shortfall of investment (CAG, 2014). Another
significant issue is that in spite of the SEZ Act advocating investment to encourage
exports oriented activities in the manufacturing and services sectors, the main player
to the development of SEZs in India has been the IT/ITES sector. Investment in SEZs
is principally concentrated in IT and IT enabled services, significantly more than the
manufacturing sector has attracted. There has been large scale movement from the
STPI units (only 45 per cent) to SEZs in the last decade. Furthermore, it has been
found that multi product sector has registered 67 per cent shortfall in investment in the
various selected zones located in many major states. It has also been noted that IT
Sector has witnessed more than 26 per cent of shortfall in investment (Department of
Promotion and Productivity, 2014).
104
5.9 Employment in SEZs
The number of employment opportunities has been created, as it is most

important indicator to determine the realisation of objective for establishment of SEZs
in a labour-surplus economy such as India. Population of India demand employment
oriented economic activities and it is among the top priorities of government.
The number of people employed in SEZs in India from February 2006 to September,
2014 is shown in table 5.6 in actual numbers. It also reflects on the total employment
created by Central Government SEZs (2, 11,348 people), higher to private/state
government SEZs and notified SEZs (1, 13, 8723 persons).
Table no 5.6: Employment in SEZ
Direct employment created in notified 10,63,046 people (all incremental

SEZs (30th September, 2014) employment generated after February
2006)
Direct employment in private/state govt. 75,677 person (incremental employment
SEZs which came in to force prior to SEZ generated since Feb. 2006 as 63,209)
Act, 2005 (30th September, 2014)
Direct employment in 7 SEZ established 2,11,348 person (incremental
by the Central Government (30th employment generated since Feb. 2006
September, 2014) as 89,112)
Total 13,50,071 persons
Table 5.7 indicates that job opportunities created by central government owned
SEZs is four times higher than that by the state government/private SEZs for the year
2007-08. Also the number of employed persons per unit is 172 and 111 for central and
state government SEZs, respectively.
Table no 5.7: Employment in SEZs Set up Prior to SEZ Act, 2005
Employment ( Person) No. of Units

Central Government SEZs 193,474 1,122
State Govt/Pvt. SEZ 44,768 403
Total 238,242 1,525
It is evident from the fact that central government owned SEZs has generated
more employment opportunities than the other SEZs such as state government and
private owned. Among the central government SEZs, the highest employment
105
providers are the SEEPZ, Noida and MEPZ SEZs with 43, 17 and 15 per cent shares
in total employment, respectively. Also, the employments opportunities for men and
women are equally distributed in general except in the Noida SEZ were employment
opportunism are more inclined towards men than women (table 5.8).
On the other side, employment opportunities provided by state
government/private SEZs, Surat and Nokia SEZs reflected the highest numbers, while
Jodhpur and Mahindra City (auto ancillary) SEZs were lying at bottom being lowest
employment creators. Another noteworthy trend has been observed that these SEZ‟s
units also provide majority employment to female. Establishment of SEZs also has
done well in terms of creation employment opportunities for large number of skilled
workers. It is reflected from the fact that between period of 2011 and 2014, SEZ
employment increased more than 51 per cent from the earlier 844,916 in 2011 to
1,283,309 in 2014 (Department of Commerce, GoI, 2015).
Table no 5.8: Government SEZs Employment (EPZs converted to SEZs)
Direct Employment
Sl. Zone No. of Men Women Total
no. Units
Approved
1 Kandla SEZ 167 9873 9129 19002
2 SEEPZ SEZ 333 58747 26356 85103
3 Noida SEZ 200 27080 5920 33000
4 MEPZ SEZ 106 12706 16489 29195
5 Cochin SEZ 120 6336 5038 11374
6 Falta SEZ 154 5612 5988 11600
7 Visakhapatnam 42 2342 1858 4200
SEZ
8 Total 1122 122696 70778 193474
A close observation of overall employment pattern in India, it is very much

evident that developed states from western and southern region contribute to the
employment creation to the larger extent. There has been steady growth of
employment in SEZ units over the year. Analysis of data from table 5.9, reflects that
growth in employment opportunities in states such Tamil Nadu, Maharashtra,
Karnataka, Telangna, Andhra Pradesh and Gujarat has seen rapid growth and they
represent more than 50 per cent of employment opportunities of the country. Several
106
northern and eastern states share in terms of employment in SEZ has been lacklustre.
As employment in SEZ also depend on number of SEZ has been established in that
particular states, that too depend on presence of adequate business environment with
industry friendly policy, peaceful business environment, raw material, adequate
physical infrastructure (roads, electricity, water and many more).
State such Rajasthan, Madhya Pradesh, Odisha, Punjab and Chhattisgarh
which do possess large amount of population but employment opportunities in these
states is very limited.
Table no 5.9: States/UTs-wise Details of Contribution of Employment from SEZs
Employment* (In Persons)

Sl. No. States/UTs 2011-12 2012-13 2013-14 2014-15 (as on
30.9.2014)
1 Gujarat 42097 51190 75586 64356
2 Karnataka 85055 141366 193686 206096
3 Tamil Nadu 219989 237950 268405 288160
4 Maharashtra 194469 271134 339919 340061
5 Kerala 23799 25701 32311 45581
6 Andhra Pradesh 117266 144346 157280 46024
7 Telangana 0 0 0 128749
8 Uttar Pradesh 63637 75101 83970 89684
9 West Bengal 36309 55656 48112 49599
10 Haryana 29220 38497 50208 54732
11 Madhya Pradesh 12313 12429 10308 10440
12 Rajasthan 11028 13163 14574 16254
13 Chandigarh 7620 6140 5927 6369
14 Chhattisgarh 0 119 119 40
15 Odisha 1787 1715 1577 2043
16 Punjab 299 369 1299 1855
17 Goa 28 28 28 28
TOTAL 844916 1074904 1283309 1350071
Source: Dept. of Commerce, GoI, 2015

* Calculated on cumulative basis.
It can be observed from the table 5.9 that some major states such Bihar,
Himachal Pradesh, Jammu & Kashmir and Assam do not feature in the list because
they do not possess even one SEZ to be added in employment calculation. Developing
states such Uttar Pradesh and West Bengal do reflect some decent numbers in terms of
employment in SEZ mainly due to availability of some attractive location in these
states. As most of SEZ units of Uttar Pradesh are situated in National Capital Region
107
(NCR)15 due to proximity to national capital and presence of adequate infrastructure,
on the other hand most of SEZ in West Bengal is located in coastal area or nearby
Kolkata mainly due to proximity with ports, not due to policy of state government or
anything else.
5.9.1 Shortfall in Employment
Most significant objective of SEZ Act was creation of Employment

opportunities i.e. both direct employment for skilled and unskilled workers,
furthermore indirect employment too. According to the data from Comptroller and
Auditor General of India 16 (2014), a comparative statistics on employment of developers
on proposed promised employment creation and the actual employment created
suggested there is vast gap between the two.
Table no 5.10: State wise Shortfall Status of Employment in SEZs
No. of
Employment (Number of people)
Sl Developers Shortfall (%)
no. States / Units Projected Actual Difference
1 Andhra Pradesh 33 16,78,945 1,13,780 15,65,165 93.22
2 Maharashtra 19 5,06,242 34,999 4,71,243 93.08
3 Tamil nadu 5 50,647 10,470 40,177 79.32
4 Kerala 4 8,551 1,545 7,006 81.93
5 Karnataka 10 2,08,875 44,483 1,64,392 78.7
6 Odisha 2 5,200 1,688 3,512 67.54
7 Gujarat 12 12,47,077 42,650 12,04,427 96.58
8 Rajasthan 2 40,000 8000 32000 80
9 West Bengal 8 1,58,550 22,742 1,35,808 85.65
10 Uttar Pradesh 11 4,617 1,082 3,535 76.56
11 Chandigarh 5 7,578 2580 4,998 65.95
12 Madhya Pradesh 6 1395 766 629 45.09
13 Total 117 39,17,677 2,84,785 36,32,892 92.73
This comparative analysis reflects the figure of only those developers where
shortfall was noticed (up to March 2013) even after five years of their notification of
15
National Capital Region (NCR) is inter-state region with NCT-Delhi as its core. The National Capital
Region as notified covers an area of about 34,144 sq kms falling in the territorial jurisdictions of four
State Governments namely, National Capital Territory of Delhi, Haryana, UP, and Rajasthan and
constitutes about 1.60% of the country‟s land area.
16
The Comptroller and Auditor General (CAG) of India is an authority, established by the Constitution
of India , who audits all receipts and expenditure of the Government of India and the state
governments, including those of bodies and authorities substantially financed by the government.
108
SEZ. It was observed that in the selected 117 Developers/Unit in 12 major states the
actual employment (2, 84,785) is much less than the promised (39, 17,677) by the
Developers/Units, it has fallen short of approximately 93 per cent (in absolute number
being 36, 32,892). All states, five states viz Andhra Pradesh, Maharashtra, West
Bengal, Karnataka and Gujarat contribute nearly 90 per cent of the total shortfall of
the employment.
5.10 FDI and SEZs Spillovers on Economy and Regional Development
FDI in India has contributed efficiently to the inclusive growth of the economy
in the recent years. India is growing economically with amply of convictions,
associations, business houses and individuals willing to invest, and their demand has
always been for high quality product and work. It has led to emergence of India as one
of the „most favoured destination‟ for FDI in Asia and the world.
5.10.1 Rapid Economic Development
Economic development of India needs an understanding of the functionality of

the government at the centre and state levels. Information on prospective Indian SEZs
as industrial townships with manufacturing and service based units, which enjoy tax
concessions, exemption form many regulations to produce export oriented goods and
services is useful. The central government launched SEZ scheme to attract domestic
and global investors towards export oriented production.
To reduce regulatory hazards, SEZ Act has created the office of the
Development Commissioner, to sort out regulatory issues on power, water,
environment and labour clearances through governmental single window initiative
(Singh, 2009). This window is supposed to reduce the transactions costs, without it
investors forced to go through offices of numerous state- and central-level ministries
for investment approvals.
The gravity of attraction of an investor would rest on size in terms of
international operations, and its contribution to exports, revenue generation,
employment creation and technology transfer and development. Labour intensive
manufacturing does led to favourable policy to create good industrial environment, for
India to be established as investment destinations.
109
A successful SEZ investment in India would further enhanced if following
investment related issues are addressed, such as rehabilitation and resettlement of the
displaced people; investors need to discover synergies with state governments, which
could be helpful in clearing infrastructure based projects such as roads, airports ports
and rail network in that state.
5.10.2 FDI & Economic Growth
According to United Nations Conference on Trade and Development
(UNCTAD), India has continued to be among the top five attractive destinations in the
world. It has continue to be an attractive destination for more than a decade for
international business on account of its resilient economy, its increasing young
population, consumption market, engineering sector and development of high
standard infrastructural facilities. FDI have created new prospects for India‟s
development and enhanced the capacity of domestic firms as well as the globalisation
of few of them. Dynamic nature of FDI is inversely connected to economic
development. Economic development is poorer in those countries where economic
stability is absent (UNCTAD, 2002). FDI inflows have positive effect on economic
development whereas instability has an adverse effect on economic development.
Table no 5.11: Cumulative FDI Flows into India (2000-2014)
1. Cumulative amount of FDI inflows

(from April, 2000 to January, 2014)
(Equity inflows + „Re-invested -- US$ 318,885
earnings‟ +„Other capital‟) million
2 Cumulative Amount of FDI Equity Rs. 1,009,781
Inflows crore US$ 212,031
(excluding, amount remitted through million
RBI‟s +NRI Schemes)
Source: Department of Industrial Policy & Promotion Report, 2014
Economies with higher level of instability tend to have lower or more

fluctuating economic growth rates, and also appear less investment friendly and
attractive destination for foreign investors. Due to these characteristics most of the
countries and companies prefer China and India as their economy is stable with huge
potential. Generally in India a foreign investor get 4 per cent return as compare to 1
per cent to other countries, so they are attracted to proposition of no dead investment.
110
Table no 5.12: FDI Inflows during Financial Year 2013-14 (from April, 2013 to
January, 2014)
1. Total FDI Inflows into India
(Equity inflows + „Re-invested
earnings‟ + „Other capital‟) -- US$ 28,807
(as per RBI‟s Monthly bulletin dated: million
10.03.2014).
2 FDI Equity Inflows Rs. 113,401 crore US$ 18,749 million
Source: Department of Industrial Policy & Promotion Report, 2014
The cumulative Foreign Direct Investment (FDI) inflow since 2000 and up to
January 2014 amounted to the US$ 212,031 million. According to data compiled by
the Department of Industrial Policy and Promotion (2014) the inflows in April 2013 to
January 2014 were US$ 18,749 million. The significance of inflow reflect that India is
becoming an attractive destination for investment for companies, even in this on-
going phase of recession in the world, India is receiving high amount of FDIs, but we
still lag behind many countries in terms of attracting FDI. Our total FDI till January
2014 has been US$ 28,807 million. Table 5.12 provide information on FDI equity
inflows, as it will increase in 2015 as government is approving new FDI reforms for
different sectors.
5.10.3 Special Economic Zone and Exports
The SEZ policy and Export promotion activities facilitated the progression of
the Indian Special Economic Zones. The introduction of Special Economic Zones
policy in 2000 gives many dividends as estimated during their inception but still far
from the desirable results. One of the main reason for the under achievement of
existing Special Economic Zones were poor import-export policy of India, which was
burdened with enormous taxes and duties. The Government of India reformed the
export policy to facilitate for smoothening to conduct easy business and stimulate the
growth of SEZ. This generated a friendly environment for the development of
manufacturing units within the premises of Special Economic Zones. These dedicated
export oriented units were termed Export Oriented Units (EOU) and they were shaped
to enhance the export potential of SEZ. Additionally, these EOU were conceived in
such a way, so that they can focus specially on the development of exports trade (Palit
and Bhattacharjee, 2008).
111
Further, they are also facilitated to sell their products in the local markets, after
payment of entitled tax and within the direct tariff area. Only selected produces are
barred from selling process product in local market. Subsequently, the growth of SEZ
and promotion of export oriented manufacturing could be observed at the same time.
Since the establishment of the SEZ Act in 2005, official approval has been granted to
491 SEZ proposals all over the country and a total of 196 SEZs have effectively
begun exporting products from India. Enterprises functioning in Indian SEZs are
entitled to take benefit of several incentives comprised of duty free procurement of
raw materials for the operation, maintenance and development of SEZ activities
together with exemptions from income, service and sales taxes.
Table no 5.13: Exports from the Operational SEZs, 2005-14
Years Exports Growth over

Value in Rs. Crores Billion USD previous year
1 2005-2006 22,840 5.08 -

2 2006-2007 34,615 7.69 52%
3 2007-2008 66,638 14.81 93%
4 2008-2009 99,689 22.15 50%
5 2009-2010 2,20,711 49.05 121%
6 2010-2011 3,15,868 70.19 43.11%
7 2011-2012 3,64,478 81.00 15.39%
8 2012-2013 4,76,159 88.18 31%
9 2013-2014 4,94,077 82.35 4%
According to the data from table 5.13, availed by Ministry of Commerce and
Industry (GoI), SEZs‟ share of total Indian exports increased from 24.86 per cent in
2011-2012 to 26.10 per cent in 2013-2014. That reflects in that period SEZ exports
valued for US$ 60.76 billion and US$ 82.37 billion, respectively. It is also evident
from the table 5.13, that establishment of SEZ did achieve the goal of manufacturing
and export of goods from India. It shows that India‟s export growth from SEZ grown
very positively over the year. It is evident from the fact that during the period of 2005-
11, growth in export has been phenomenon and growth rate during the period has
been more than 71 per cent. But it is only during period 2011 to 2014 the growth of
export has witnessed declining pattern with just 16 per cent growth rate. Infect it only
during the period of 2013-14 growth rate of export as low as 4 per cent, lowest in two
112
decade. It is during the period of 2009-10 that SEZ witnessed highest growth rate of
121 per cent with US$ 49.05 billion. Data suggest that finest performance of SEZ has
been for the period of 2012-13, reflected with amount of US$ 88.18 billion in export.
State wise analysis of export pattern from SEZ reflects an interesting fact, as
table 5.14 shows that overall growth in export has been almost negligible and to the
larger extent has been declining particularly for the year 2013-14 and 2014-15, which
has witnessed negative growth rate in export. It also reflect that major states in India
possessed steady growth in export activities from year 2011-12 to 2013-14, but a year
later in next three quarters (2014-15) almost all state has suffered from decline in
growth of export from SEZ, being adversely affected by the lack of demand in
international market.
Table no 5.14: States/UTs-wise Details of Contribution of Exports from SEZs
Exports (Rs. in Crore)

Sl. No. States/UTs 2011-12 2012-13 2013-14 2014-15 (as
on 30.9.2014)
1 Gujarat 182414.33 226937.74 225042 107602.42
2 Karnataka 22006.81 39363.94 51372.88 21682.80
3 Tamil Nadu 50152.39 67618 71417 35847.40
4 Maharashtra 24198.83 42962.25 56399.23 26073.40
5 Kerala 31373.3 33824.47 8003.64 2853.77
6 Andhra Pradesh 18163.8 27687.71 33291.07 3955.01
7 Telangana 0 0 0 16598
8 Uttar Pradesh 13637.38 12591.49 16282.42 7736.87
9 West Bengal 14870.7 15050.7 16204.27 2696.75
10 Haryana 3442.95 4980.75 8740.43 5397.80
11 Madhya Pradesh 1637.12 1937.16 2984.23 2048.65
12 Rajasthan 1315.69 1498.42 2036.59 1039.78
13 Chandigarh 1103.25 1339.93 1778.15 1024.80
14 Chhattisgarh 0 9.56 1.84 2.96
15 Odisha 158.27 217.21 386.09 115.62
16 Punjab 2.91 139.6 136.72 145.52
17 Goa 0 0 0 0
TOTAL 364478 476159 494077 234821
Source: Dept. of Commerce, GoI, 2015

* Calculated on cumulative basis.
Even though Punjab share very negligible amount of employment in SEZ as
compare to major states such Gujarat, Tamil Nadu, Maharashtra, Andhra Pradesh, it
has been only state in the country which has witnessed positive growth during this
period. Due to lack of demand and economic slowdown several sates suffered with
113
more than 50 per cent decline in employment in SEZ units, also closure of many units
(Department of Commerce, GoI, 2015).
SEZs spread all over the country reflects an interesting picture as even though
in quantity IT/ITES are largest but in case of physical export, Indian manufacturing
sector is still leading.
Table no 5.15: Exports from SEZs Established by Central Government (as on

30.6.2012)
Rs. Crores
Sl. Name of the

Location Type Physical Exports
No. SEZ
IT/ Manufactu
Trading Total
ITES ring
Kandla Special
Kandla, Multi
1 Economic 0 21.45 748.4571 769.9071
Gujarat product
Zone
SEEPZ Electronic
Mumbai,
Special s and
2 Maharash 0.86 162.15 2413.18 2576.19
Economic Gems and
tra
Zone Jewellery
Noida Special
Uttar Multi
3 Economic 210 0 1658.03 1868.03
Pradesh product
Zone
MEPZ Special Chennai,
Multi
4 Economic Tamil 751.31 0.04 2057.44 2808.79
product
Zone Nadu
Cochin Special
Cochin, Multi
5 Economic 128.03 14.19 7883.3 8025.52
Kerala product
Zone
Falta Special Falta,
Multi
6 Economic West 0 27.11 145.51 172.62
product
Zone Bengal
Vishakha
Visakhapatna patnam, Multi
7 21.18 98.37 498.84 618.39
m SEZ Andhra product
Pradesh
8 Total 1111.38 323.31 15404.757 16839.4471
Exports from State Govt./Private Special Economic Zones established prior to SEZ Act.
9 Total 26901.33 1834.649 48802.97 77538.9458
10 Grand Total 28012.71 2157.959 64207.727 94378.9458
Source: Dept. of Commerce, GoI, 2015* Calculated on cumulative basis.
Data till 2012 from SEZ on export shows many interesting facts such as
manufacturing sector exported the goods worth Rs. 64207.727 which more than
114
double of contribution from IT/ITES sector of Rs. 28012.71. Exports from SEZ under
State Government/Private Special Economic Zones are almost five times of Central
Government owned SEZ. It must be noted that there are only seven central
governments owned SEZ in compare to more than 500 state and privately owned
SEZ.
Table 5.15 also reflects on the fact that central government owned SEZ put
more emphasis on manufacturing sector, with purpose of creation of job opportunity.
In respect of export, among seven central government controlled units Cochin Special
Economic Zone (Rs. 8025.52), MEPZ Special Economic Zone (Rs. 2808.79) in
Chennai and SEEPZ Special Economic Zone (Rs. 2576.19) performing much better
than other four SEZ, as these three SEZ contributes around 80 per cent of physical
export from SEZ.
Most of IT/ITES SEZ is developed as private entity performing better and
there performance is better than government owned SEZ units in terms of export.
Availability of skilled manpower, better market for IT/ITES products/services, and
end of tax holiday in STPI contributed to establishment of large number of IT/ITES
units as SEZ. Availability of infrastructural facilities and lesser requirement of area
has been also the major driving factor.
Data provided by DGCIS, Kolkata (table no 5.16) reveals that exports from
SEZ units has reported with INR 2.2 trillion for 2009-10 fiscal year. It increased by 43
per cent to touch the mark of INR 3.16 trillion in 2010-11 fiscal years. These SEZs
units have also created more than 840,000 employment opportunities as of 2010-11.
Exports from Indian SEZs rose to further by 15.4 per cent with export worth of INR
3.64 Trillion (approximately US$66 billion).
Table no 5.16: Status of Export and Employment
Financial Total Exports of the Total SEZ Export % Share of SEZ Employment
Year Country (Rs. (Rs. Crore) exports in the total in SEZ*
Crore) exports of the Country
2011-12 14,65,959 3,64,478 24.86 8,44,916
2012-13 16,35,261 4,78,159 29.12 10,74,904
2013-14 18,92,892 4,94,077 26.10 12,83,309
*calculated on Cumulative basis
Data Source: DGCIS, Kolkata, 2015
115
For 2011-12 fiscal years, investments in these economic enclaves worth over
US$ 36.5 billion (INR 2.02 trillion). Data (table 5.14 and 5.15) also suggest that
exports from Indian SEZs have witnessed a growth rate of 50.5 per cent for the past
eight fiscals year from US$ 2.5 billion in 2003-04 to about US$ 65 billion in 2011-12
(with share of 23 per cent of India's total exports).
5.10.4 Shortfall in Export
The establishment of SEZs was visualised as a vital strategic instrument to
accelerate the economic growth with export oriented trade. Henceforth, the increase in
exports from SEZ has been significant for the success of SEZs. It has shown sign of it
in the form of increased production and exports of product from SEZ. It was also
observed that the actual exports (1,00,579.70 crore) against the proposed projections
(3,95,547.43 crore) in selected 84 Developers/Units in 9 major states reflects that
there is gap of 74.57 per cent between actual and proposed export from the SEZ.
Table no 5.17: State wise Shortfall Status of Export
No. of Exports (Rs in Crore)

Sl Shortfall
States Developers
no. (%)
/ Units
Projected Actual Difference
1 Andhra Pradesh 18 1,84,592.72 11,415.50 1,73,177.22 93.81
2 Maharashtra 18 55,135.78 13,865.56 41,270.22 74.85
3 Tamil nadu 5 1,22,670.89 64,526.40 58,144.49 47.39
4 Kerala 12 2,468.76 5,76.73 1,892.03 76.64
5 Odisha 2 4161 618.64 3542.36 85.13
6 Rajasthan 2 11000 2251.09 8748.91 79.54
7 Uttar Pradesh 12 6,984.15 3,202.33 3,781.82 54.15
8 Chandigarh 9 5,648.34 3,041.11 2,607.19 46.16
9 Madhya Pradesh 6 2885.83 1082.34 1803.49 62.49
10 Total 84 395547.43 100579.7 294967.73 74.57
Four major states in southern and western India viz., Andhra Pradesh,
Maharashtra, Tamilnadu and Rajasthan comprises 72.61 per cent of total shortfall in
exports (table 5.17). The shortfall is substantial in multi-product SEZs (23.94 per
cent) and this was followed by pharmaceutical sector based SEZs (22.17 per cent)
across India.
116
5.10.5 Foreign Exchange Earning
Norms suggest that Net Foreign Exchange (NFE)17 to be calculated
cumulatively for a period of five years from the date of commencement of production
in plant. Export growth is one of the important prospects of SEZs, but the only
requirement imposed on them is to have positive net foreign exchange balance which
applies only to manufacturing units in the zone, not for the SEZ as a whole. An
average 15 per cent of exports has been sold through Domestic Tariff Area (DTA), not
including NFE, has overtaken the valuation of DTA sales counting for positive NFE.
Table no 5.18: State wise Shortfall Status of Net Foreign Exchange
Sl No. of Developers/ Shortfall

States Net Foreign Exchange (Rs in Crore)
no. Units (%)
Projected Actual Difference
1 Andhra Pradesh 5 413.66 85.46 328.22 79.34
2 Maharashtra 9 1302.52 800.18 502.34 38.56
3 Tamil nadu 13 32069.18 4841.5 27227.67 84.9
4 Kerala 8 495.54 257.68 237.86 48
5 Karnataka 3 3721.09 1228.58 2492.51 66.98
6 Rajasthan 5 109.42 68.16 41.26 37.71
7 West Bengal 6 240.27 46.27 194 80.83
8 Uttar Pradesh 13 3657.42 321.50 3978.92 108.79
9 Chandigarh 8 4741.72 2144.74 2596.98 54.77
10 Madhya Pradesh 4 1784.05 795.18 988.87 55.43
11 Total 74 48534.87 9946.26 38588.61 79.5
It was also observed from the table 5.18 that there was shortfall in respect to
74 operational SEZ units with completion of five years in the following 10 major
states. It suggests that five major states viz., Tamilnadu, Karnataka, Uttar Pradesh,
Maharashtra and Chandigarh accounts for 97.87 per cent of the total shortfall in Net
Foreign Exchange. However these promised projections are not binding on enterprise,
though, they do serve as benchmarks for assessing a SEZ unit‟s success/failure.
No records are available on the current operations and intended scale of operations.
Consequently there is no record regarding corrective measures initiated to check and
17
Foreign exchange earnings are profits made from selling goods and services in a global marketplace,
though in some cases, currency is simply exchanged in order to make these earnings without goods or
services being sold. These earnings come in the currency of the country where the products or services
are sold, so they have to be exchanged in order to be calculated.
117
understand the possible reasons for the shortfall. Absence of any vigilant monitoring
mechanism to redress possible reasons for the shortfalls makes the “projected figures”
full of redundancy and limitations. However, there are some SEZ that has exceeded
the expectations.
5.10.6 Relief and Rehabilitation
Ministry of Rural Development enunciated the Relief and Rehabilitation
Policy (2007), says that investors should not acquire the fertile land. Displacement of
local population was to be kept as minimum as possible. Rigorous surveys of the area
to be conducted for social impact assessments and public hearings were proposed.
Policy draft says that alternative locations for rehabilitation for displaced population,
particularly for the tribal population, were suggested. Land acquired for one activity
should not be diverted for other activities. It was proposed that the government may
take the initiative to acquire 30 per cent of the total requisite land by developers,
particularly in order to acquire contiguous land, which could be difficult for private
companies at their own. Initiative of being investment and market friendly towards
foreign investment with potential of revenue, employment and infrastructure were
evident from the success of SEZ policy in general. Without the special tax benefits,
relaxation, exemption and infrastructural facility accorded by SEZs, attracting these
investments may have been difficult as competitive countries such as China, Vietnam
and Malaysia providing such facilities may be more (Aggarwal, 2005).
Due to occurrence of Nandigram violent protest the Government of India was
contemplating for 100 per cent consensus from the local people before final approval
of establishment SEZs (Chandrasekhar, 2006). It is to ensure that violent dissent
would not be repeated due to forced land acquisition by exercising the (land
acquisition act) LAA 1894. SEZs land acquisition has invited many farmers led
protest across the country.
5.10.7 Maintain Regional Balance
It has been experienced on various account, generally the government obtains
consent of 85 per cent of the land owner in the area where SEZ to be located and rest
of requisite land acquired by force. During the process, the government acquire (buys)
dry land; provide a reasonable compensation on market price, assured jobs to the
people, whom are supposed to be displaced in proposed establishment. Public
hearings and meeting are held to develop consensus among up to 85 per cent of the
118
population with appropriate bargaining and benefits for the affected population. After
confirming that the majority of the people are satisfied, the government invokes
public purpose to acquire rest of the requisite land as per the LAA (Land Acquisition
Act) of 1894. Victim of land acquisition generally does not go to court for their right
due to attached cost of legal action and time, government is willing to face the court
for required land and if matter being taken to court. It is evident from the fact that the
involvement and the role played by the state in land acquisition is critical, and any
form of policy that limits the state in acquire up to 30 per cent of the SEZ land, will
make it tough for investors and to make it enterprise operational. It is visible that there
can‟t be a uniform solution to the problem of land acquisition and rehabilitation; it
varies with socio economic structure of the region (Levien, 2011).
5.10.8 Helpful in Development and Advancement
As it is well-known fact that, India has advanced world-class Information
Technology (IT) and Information Technology Enabled Services (ITES) sector that
exports its software‟s and services internationally. Yet for all of India‟s achievements
IT and service sector, there is prevalence of high level of poverty and unemployment
rates. India may have performed well in IT and ITES sector, but when it comes to
exporting the manufacturing based products; India is the poorer cousin of China.
Henceforth, there is great attention has been paid within India to support the export-
oriented manufacturing sector through establishment of Special Economic Zones.
This is the relation of two Asian giants while SEZs offers a prospect for India to break
new ground, the inevitable comparisons with China highlight the distance that India
needs to cover. Over the year India‟s has been overshadowed by China‟s higher GDP
(Gross Domestic Product) growth and industrial growth. Most macro-economic
indicators reveal that, India‟s overall economic development is far away from China
(Tantri, 2012).
However, considering the current economic indicators, it is evident that India
has some important economic advantages over China and other developing countries
may help in drawing foreign and domestic investors to invest in SEZs. India‟s has one
of largest education system which produces quality talent. China may have a higher
literacy rate of 95 per cent as compared to India‟s literacy rate of 74 per cent. But, the
regular Indian tertiary graduate attributed with a more recognized qualification.
119
While more than half of India‟s economy‟s GDP is service sector based,
India‟s industrial sector is growing at roughly 6.6 per cent and India‟s exports have
been growing at 7.2 per cent annually, even though SEZ in India is in its infancy stage
but contribution and growth has been highly encouraging. With many imitative taken,
series of concession and relaxation in taxes, regulations etc., has created an
investment friendly perception about India at international arena. Investors see India
as an attractive destination to conduct business. India‟s being the attractive destination
for investment lies in the fact that it has surplus low cost labour; an established and
stable legal system; well-established financial institutions, large number of young
population in compare to China‟s aging population, government relaxation to enclave
like SEZ and large number of English-speaking human resource. Taking the China
model as an export oriented manufacturing and investment, India enacted of SEZ Act
2005. It provide numerous amount of incentives and relaxation in approval,
implementation and operationalization of SEZ units in designated geographic areas,
aimed at catalysing the whole economy through export-oriented manufacturing and
services. SEZs are distributed all parts of India but distribution has been cursed with
regional disparity and inequality (Levien, 2011).
5.11 FDI Spillovers on SEZ and Economy
The main emphasis of the section is to focus on the question, whether SEZ
produces spillovers that can help host economy to develop in terms of creation of
employment, technological advancement and effects on domestic firms to be more
competitive. The empirical study reveals that the productivity spillovers take place
horizontally from multinational companies to domestic companies within the given
particular industry. However, the positive relationship ends here, when the estimate is
based on the domestic firm‟s samples only. It‟s difficult to find any evidence that
productivity or employment spillovers took place due to establishment of SEZ
through investment by foreign and domestic within backward linkages (where
domestic firms supply raw materials to foreign companies) or through forward
linkages (where foreign firms supply raw materials to domestic companies) (Parwez,
2014). The results are along the lines of the present status of the manufacturing
industry attributed with the inefficiency of forward and backward linkages between
companies within the industry. Given the limited transaction between multinationals
120
and domestic firms, it would be tough for productivity spillovers from multinationals
companies to take its effect through forward or backward linkages mechanism
(Sharma, 2009).
For spillovers to take its effect the prevailing linkages among firms need to be
strengthened and at the same time, the development of the capabilities among
domestic firms must be supported. To achieve this, the production and supply of
produce would be crucial. The absence of an effective and efficient supply base has
limited the type of FDI flows that the country has able to achieve, these happen to be
generally manufactured exports oriented product that require relatively less skills, less
technical machinery, labour intensive, and import reliant (Tripathy, 2008). These types
of investors and investment are highly mobile, depending upon the presence of
relatively competitive and cheaper labour offering locations, the country becomes less
or more attractive for investment. With the limited participation of domestic firms in
the production process and networks of MNCs in these industries, it limits the effect
of spillovers into the domestic economy.
Figure no 5.5: SEZ Performance in India (December 2014)
Total Export from SEZ in

India- About 2,34,821 Crore
(26.10 % of Total Export)
FDI share in Investment Export Growth Rate is

– approx. - 65 % approx. decrease of - 4.79
%
SEZ
Indirect Employment Direct Employment

Generate approx. 20 Generate approx. is
lakh persons 13,50,071 persons
Source: Conceptualise by the Author
As data from ministry of commerce suggest that India has exported goods and
services amount 2,34,821 crore, which is 26.10 per cent of total export by India in
2014. But the export growth from the corresponding previous year (2013-14),
121
witnessed negative growth of 4.79 per cent. SEZ performance in terms of attracting
FDI has been significant; it is approximately 65 per cent of total FDI received by
India. In context of most important component, SEZ employed 13, 50,071 person till
2014.
While the India‟s exports are concentrated in high end information
technological products and services, but it is indigenous in nature. In case of
manufacturing industrial set up SEZ are labour-intensive, highly import dependent,
and technically low value added. Hence, the backward network to the domestic firms
that have been developed by foreign manufacturing firms has been limited
(Chandrasekhar, 2009). To increase productivity and profitability, it is important for
industry as whole to move up towards higher segments of the value chain.
With growing regional economic integration in East and Southeast Asian
countries, impending opportunities could emerge from the growth of regional
production linkages where backward and forward stakeholder could act as sub-
contractors of end product. Networking and transection with domestic firms offer
possibilities of technology advancement and transfer, same time provide a favourable
route for domestic firms to access global markets (Ge, 1999). The requirement of
strengthening domestic firms and improving their networking with foreign firms are
necessary pre-requisite for the country to benefit from the expected FDI flows arising
from the establishment of regional production set up such as SEZ.
To improve the competitiveness of domestic firms and strengthen their
networking with foreign companies, the government needs to apply a more
comprehensive approach. This approach should combine industrial re-structuring to
develop domestic firms and create an atmosphere conducive for the innovation and
expansion of FDI-related spillovers by increasing participation in higher strata of
industry value chain.
5.12 Revenue Loss and under-performance of Special Economic Zone
As per Comptroller and Auditor General of India report (2014) that more than
50 per cent of land allotted to special economic zones (SEZs) across the country
remains idle, and its very purpose was defeated with no significant increase in
employment even as the government's revenue foregone was to the tune of Rs. 83,000
crore between 2007 and 2013 due to tax concessions.
122
Table no 5.19: Revenue Foregone in Central Excise and Customs on Account of
Special Economic Zone (SEZ) Scheme in India
Revenue Foregone in Central Excise and Customs on Account of Special Economic Zone
(SEZ) Scheme in India (2004-2005 to 2009-2010)
(Rs. in Crore)
Year Central Excise Customs
2004-2005 20.19 1057.12
2005-2006 23.31 1047.49
2006-2007 220.92 1642.35
2007-2008 851.76 1803.95
2008-2009 804.73 2324.29
2009-2010 1547.04 3987.06
Source: Department of Commerce (GoI), 2012: CAG, 2014
Comptroller and Auditor General (2014) reported that ineligible tax

deductions were extended to companies, some of which diverted land allotted to other
uses. There was overall decline in manufacturing in these zones. Revenue loss also
included the loss to the exchequer on account of central excise and service tax that
could have accrued if these companies were brought out of the SEZs. The revenue
foregone, or loss to the exchequer, could be many times more considering other
concessions availed by these companies such as stamp duty, Value Added Tax (VAT),
Central Sales Tax (CST) etc., could not be quantified in the absence of any monitoring
mechanism.
A similar study on functioning of SEZs was carried out by the parliamentary
standing committee on commerce in June 2007 where it had estimated the duties
foregone at over Rs 1.75 lakh crore from tax holidays granted to SEZs between 2004
and 2010. On the other hand data from Department of Commerce (GoI) says that
revenue foregone because central excise and coustoms duty amount to Rs. 5534.1
crore till year 2010.
CAG report also reported that „the purpose of setting up SEZs was to create
large scale employment, investment, exports and economic growth‟ but national
indices on economic growth, trade infrastructure, investment and employment
generation did not show any upward trend due to SEZs. Further CAG found that
"Land acquired for public purposes was subsequently diverted (up to 100 per cent in
some cases) after de-notification," the report said. "Seventeen states were not on
board in implementing the SEZ Act with matching state level legislations, which
123
rendered the single window system ineffective. Developers and unit holders were
almost left unmonitored, in the absence of an internal audit set-up.
Even though with numerous encouraging steps taken by the government for
the growth and development of SEZ in the country but impact on the economy has not
been that significant. With initiation of new manufacturing campaign of „Make in
India‟18, Special Economic Zones (SEZs) are likely to be main instrument for
realisation of ambitious campaign. From year onwards 2011-12, Minimum Alternate
Tax19 and Dividend Distribution Tax (DDT)20 exemptions for SEZ developers were
ended, it has turned SEZs as an unappealing proposition. With evidences such as that
firms were misusing the programme of real estate arbitrage and that information
technology firms were using the policy to retrieve tax benefits and incentive that they
vanished when the Software Technology Parks of India (STPI)21 programme ended,
these additional exemptions and benefits were withdrawn.
Scholars argue that with taxes being imposed and complex, it is adversely
impacting interest of SEZs, while other scholars argue that, as companies have been
given various kinds of tax benefits to attract investment. What could be the point of
discussion is the level at which the tax is has been relaxed.
Though the matter of taxation is complex, it is the unpredictability of the tax
administration that has had negative effect on investments sentiments. Stability and
growth of trade and investment depends heavily on predictability and simplicity of
taxation policies for development of the conducive environment for investment,
whether foreign or domestic. However, the SEZ policy continues to be relevant from a
Make in India perspective but to enhance its economic viability, companies should be
allowed to conduct business in domestic market.
18
Make in India is an initiative of the Government of India to encourage multinational, as well as
domestic, companies to manufacture their products in India with objective of developing India as top
destination globally for foreign direct investment and manufacturing hub.
19
Minimum Alternate Tax (MAT) is a local tax that India has required companies to pay since the late
1980s. If a company's income tax in India is less than 18.5%, then it has to pay the MAT, which comes
to around 20%, including additional duties.
20
Dividend Distribution Tax (DDT) is the tax levied by the Indian Government on companies
according to the dividend paid to a company‟s investors.
21
Software Technology Parks of India (STPI), is a society of Government of India, with the objective
of encouraging, promoting and boosting the Software Exports from India.
124
India has undertaken number of free trade agreements (FTAs) 22, with countries
such as Japan, Sri Lanka and the Association of Southeast Asian Nations (ASEAN),
with import duties and taxes have been reduced to zero for a number of product. This
has negative impacts on domestic business of SEZ units, which are highly taxed. India
should be recognised as the „most favoured nation‟ status as this will lead to lower
tariff under the FTAs, reductions and exemption should be extended to all
manufacturing companies, not only the SEZs units.
But it is evident from the fact that only taxation issues are not the ones
hampering SEZs. As despite offering more than 300 incentives and programmes for
promotion of manufacturing activities at both the centre and state levels, industrial
manufacturing growth has not been up to expected results. Therefore, it implies that
all these incentives need to be re-evaluated and considered (Sivananthiran, 2007).
Exemption and relaxation should not be the only reason for firms to be located in
SEZs, as this generates a negative impression and gives wrong signal to SEZ based
units to industries located outside the SEZ establishment and to the economy as a
whole. It creates a perception that firms are being located in SEZ premise just to avail
the benefit of SEZ scheme. Profitability is the only and prime objective, excluding the
factor such as employment generation, revenue generation, development of
infrastructure, technological advancement and positive impact on economy as whole
take back seat. Success depends on the business facilitation measures adopted. Factor
such as location of SEZ, infrastructure facility, logistical issues and efficient zone
management are four key factors for determination of successful SEZs.
According to several economists stringent labour law and resultant lack of
flexibility in Indian labour laws, has considerably hampered the effectiveness of
SEZs. Kaushik Basu (2003) believes that India requires a legal regime, which allows
firms to formulate different kind of contract depending on their needs. Advocating the
fact that policy of flexibility in labour market regulation can attract foreign
investment, create jobs and lead to higher economic growth. The most important
labour law in the country is the Industrial Disputes Act (IDA), which is obsolete in
nature and unsuitable for the market today. The amendments in IDA during 1980s did
22
FTA is between two or more countries to establish a free trade area where commerce in goods and
services can be conducted across their common borders, without tariffs or hindrances but (in contrast to
a common market) capital or labour may not move freely.
125
not leave much of space free contracting. Rather, it made obligatory for a firm
employing more than one hundred workers to get permission from the state
government before retrenchment of workers, an approval that is rarely given.
According to some analysts, the worst consequence of Indian labour law
stringency is that it keeps thousands of workers unemployed due to small nature of
business as firms are wary of the fact that if they grow, will not be able to discharge
them, do not hire in the first place (Singh, 2007).
The success of SEZs in China was mainly determined by the creation and
availability of complementary infrastructure facilities such as roads, power, water and
ports; these important factors are lacking in India. To promote SEZs activities and
manufacturing in India, the emphasis of the state should be on creation of the
necessary infrastructure facilities, which is require for more comprehensive
development of SEZ and to attract investment. The absence of proper external
infrastructure support is also acting adversely. The SEZs have to be located and
connected with ports, railways and airports with world class facility of roads, rail,
ports and airports, with customs authorities practicing international norms in trade
facilitation but it is not the case at present.
This chapter reveals that there is no strong indication of significant impact of
foreign direct investment generated by SEZ on Indian economy. The analysis
indicates that India‟s SEZ has attracted more domestic market oriented FDI than
export-oriented one. Findings suggest that the major goal of FDI in SEZ in India and
other developing countries is to capture the large populated domestic market (inward
looking strategy). It is difficult to expect significant export oriented spillovers from
inward looking FDI in SEZ; same time India's factor market is less efficient compared
to other competitive developing countries in international markets. However, with the
time and enactment of SEZ (Special Economic Zone) Act, there is increase in
investments on export-oriented manufacturing. It is not only attracting the foreign
firms to set export base shop in the country, but the domestic firms to reduce their
costs and to become more competitive also setting up export oriented units. SEZs
spillovers has been noticeable extent and improved competitiveness of domestic
industry, employment creation, and technological advancement. Social infrastructure
such as power, water, sewage facilities, schools, temple, hospital, shopping area and
theatre were provided for. Local people in these areas would benefit from the
126
establishment of social infrastructure such as power, water, sewage facilities, schools,
hospital, shopping area, cultural centre and rise in price land as a consequence of
development in the SEZ.
The objective of establishing SEZ‟s in the country has been to enhance the
Gross Domestic Product of the country, FDI flow into the country reserve and
creation of more employment opportunities as the company setting up its production
unit to carry-out its operations. It will lead to reduction in unemployment and will
also lead to reduction in poverty. Though it is difficult to eradicate poverty, but this
could be positive efforts in that direction. SEZ‟s has been significant instrument in
creation of the goodwill of the country, reducing the poverty, creating employment,
and also development of better physical and social infrastructure.
127

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CHAPTER V

Special Economic Zone: Economic Implications

The magnitude of economy of given country is usually estimated from its

5.2 Theoretical approaches and Economic rationale for SEZs

Initial SEZs were set up as industrial clusters in form of Export Processing

Figure no 5.1: India’s SEZ policy

Source: Conceptualise by the Researcher

5.4 Development Models and Special Economic Zone

Recession, recovery and economic development have led to broad discussion

Figure no 5.2: Harrod – Domar Growth Model

Source: Conceptualise by the Researcher

Developing nations do not have adequately higher income level to be enabled

Traditional Surplus Manufacturing

Source: Conceptualise by the Researcher

Figure no 5.4: Rostow’s Model- the 5 Stages of Economic Development

Stage 5: High Mass Consumption

Stage 4: Drive to Maturity

Stage 3: Take Off

Stage 2: Transitional Stage Accoroding to Rostow, development

Source: Conceptualise by the Researcher

The American Economic Historian, W.W. Rostow (1960) suggested that

5.5 Tracing the Development of SEZs Worldwide

5.6 Special Economic Zone in India

An Special Economic Zone (SEZ) is an instrument for trade capacity

Table no 5.1: The Current Status of SEZ in India

Number of Formal approvals 491 (Excluding 67 SEZs approved by BoA for

Source: Special Economic Zones in India (http://www.sezindia.nic.in/), 2015

5.7 FDI and Special Economic Zones

After independence, India‟s development strategy was based on the

1 China 124 129

2 Hong Kong, China 74 103

3 United States 231 92

Source: Global Investment Trends Monitor, UNCTAD, 2015

According to research estimates of CRISIL (2013), eight infrastructure sectors,

5.8 Special Economic Zone and Investment

Exports, revenue and employment in special economic zone fundamentally

Source: Special Economic Zones in India (http://www.sezindia.nic.in/), 2014

Table 5.3 reflects investment made in central and private/state government

Sl. Zone Government Private FDI FDI Made Total Private

Source: Ministry of Commerce and Industry, Deptt. of Commerce (GoI), 2014

Table no 5.5: Real Status of Investment in SEZs from Major States

Source: Comptroller and Auditor General of India report, 2014

Five states (Andhra Pradesh, Maharashtra, Karnataka, Gujarat and Uttar

The number of employment opportunities has been created, as it is most

Table no 5.6: Employment in SEZ

Direct employment created in notified 10,63,046 people (all incremental

Source: Ministry of Commerce and Industry, Deptt. of Commerce (GoI), 2015

Employment ( Person) No. of Units

Source: Ministry of Commerce and Industry, Deptt. of Commerce (GoI), 2015

Table no 5.8: Government SEZs Employment (EPZs converted to SEZs)

Source: Ministry of Commerce and Industry, Deptt. of Commerce (GoI), 2013

A close observation of overall employment pattern in India, it is very much

Employment* (In Persons)

Source: Dept. of Commerce, GoI, 2015

5.9.1 Shortfall in Employment

Most significant objective of SEZ Act was creation of Employment

Table no 5.10: State wise Shortfall Status of Employment in SEZs

5.10 FDI and SEZs Spillovers on Economy and Regional Development

5.10.1 Rapid Economic Development

Economic development of India needs an understanding of the functionality of

Table no 5.11: Cumulative FDI Flows into India (2000-2014)

1. Cumulative amount of FDI inflows

Source: Department of Industrial Policy & Promotion Report, 2014

Economies with higher level of instability tend to have lower or more